Housing a Sweet Spot for U.S. Economy as Recovery Expands

While new-home sales are at about a third of the level they were at the peak in 2005, builders are growing more bullish. Photographer: Patrick T. Fallon/Bloomberg

Jan. 4 (Bloomberg) -- At Lambert Ranch, an Irvine,
California, housing development where prices start at $1
million, just two of 98 homes are unsold since the project
opened in May.

The builder, New Home Co., is opening 14 neighborhoods in
California this year for buyers who want to seize on low
interest rates amid a scarce supply of homes for sale.

“Everywhere we are, we can see it,” Larry Webb, chief
executive officer of Aliso Viejo, California-based New Home,
said in a telephone interview. “Talk about pent-up demand.”

U.S. home sales and prices are poised to rise in 2013,
solidifying a recovery that began last year after a half-decade
slump that was the deepest since the Great Depression, according
to analysts and economists surveyed by Bloomberg. Record-low
mortgage rates and attractive prices, supported by declining
unemployment, are luring buyers as the inventory of distressed
homes shrinks. Homebuilders are responding by adding supply,
bolstering economic growth.

“Increased new residential construction activity will lead
to employment gains, which should translate into higher
consumption and modest GDP growth,” Robert Wetenhall, a
homebuilding analyst with RBC Capital Markets LLC in New York,
said in a telephone interview. The U.S. budget deal reached this
week removes a cloud to that outlook, he said.

Sales Gains

Sales of existing homes will rise about 7.2 percent in 2013
to 4.98 million, the highest since 2007, based on the median
estimates of 15 economists and housing analysts surveyed by
Bloomberg News for this story. Prices will gain 3.3 percent
after an estimated 4.5 percent jump in 2012, according to the
forecasters, who used varying measures of values.

Building is set to jump after the inventory of new homes
fell last year to the lowest level in half a century. Housing
starts, including single- and multifamily units, are expected to
increase 24 percent to 967,000 in 2013, the most since 2007,
according to the median of 17 estimates. Starts will reach an
annual pace of 1 million by the end of this year and 1.5 million
by the end of 2016, according to a report today by Goldman Sachs
Group Inc. analysts led by Hui Shan, who said housing will
remain a “bright spot” in 2013.

Purchases of new single-family houses will climb 23 percent
to 448,000 this year, extending last year’s rebound from a
record low 306,000 in 2011, according to estimates of 17
analysts surveyed for this story.

“We expect housing to continue this momentum into 2013 and
in fact show stronger growth rates due to pent-up demand,” Mark
Kiesel, managing director at Pacific Investment Management Co.
in Newport Beach, California, wrote in an e-mail.

Buying Home

Kiesel, who predicted the home-price bubble would burst in
2006, is betting on an extended housing recovery with his
investors’ money and his own. In May, six years after selling
his last house near the real estate peak, Kiesel bought a
Newport Beach home in a sign of his conviction that prices had
bottomed. The Pimco Investment Grade Corporate Bond fund
outperformed the broader Barclays US Credit index in 2012
because of its housing-related investments, he said.

“Residential investments potentially could grow between 20
percent and 30 percent” in 2013, adding as much as 0.75 percent
to U.S. gross domestic product growth, he said.

The U.S. economy expanded at an annual pace of 3.1 percent
in the third quarter, the Commerce Department said Dec. 20.
Residential fixed investment climbed almost 14 percent from a
year earlier to $370.9 billion, its highest level since the end
of 2008. Gross domestic product will increase 2 percent this
year, based on the median of 85 estimates in a Bloomberg survey.

Jobs Growth

U.S. payrolls rose by 155,000 workers last month following
a revised 161,000 advance in November that was more than
initially estimated, Labor Department figures showed today. The
unemployment rate matched a four-year low, at 7.8 percent.

While new-home sales are at about a third of the level they
were at the peak in 2005, builders are growing more bullish. The
National Association of Home Builders/Wells Fargo Housing market
index last month rose to its highest level since April 2006. The
gauge, in which a number above 50 indicates more builders view
sales conditions as good than poor, reached 47, compared with a
low of 8 in January 2009.

The Standard & Poor’s Supercomposite Homebuilding Index
jumped 84 percent last year, the best performance since 2003.
PulteGroup Inc., the largest U.S. homebuilder by revenue, surged
188 percent for the biggest gain in the entire S&P 500.

‘Virtuous Circle’

Increases in home prices, construction employment and
consumer optimism can restart the “virtuous circle,” shifting
housing from an economic drag to an economic engine, according
to Michael Widner, an analyst with Stifel Nicolaus & Co.

“We see 2013 as the year the housing story progresses from
‘no way’ to consensus, and the GDP and job growth tailwinds
being sustainable through 2015,” Widner, based in Baltimore,
wrote in a Dec. 19 note.

Homebuilders have added another 2.8 percent in the last two
days after the government’s budget deal. The agreement keeps
homeownership tax benefits, such as the deductibility of
mortgage insurance premiums and limits on capital gains taxes,
which may help boost home sales, said Michael Rehaut, a
homebuilding analyst with JPMorgan Chase & Co. in New York.

“Not only do we view it as a positive that these favorable
provisions remain in place, but additionally, this result
continues to support our view that the emerging housing recovery
remains a top economic priority for the White House, Congress
and the Fed,” Rehaut wrote in a Jan. 2 note.

Uncertain Outlook

Not everyone is convinced the worst is over. Robert
Shiller, co-creator of the Case-Shiller index, said the outlook
for home prices is “highly uncertain” because more people are
becoming renters rather than buyers. The number of U.S. occupied
residences increased by a net 1.15 million in the 12 months
through Sept. 30, with a gain of 1.32 million rentals and a drop
of 175,000 owner-occupied homes, according to the Commerce
Department.

“We’ve seen a decline in general interest in home
ownership,” Shiller, a professor of economics at Yale
University in New Haven, Connecticut, said Dec. 27 on Bloomberg
Television. “We’re seeing rentals rise. Our permit data show
that new construction has tilted toward multifamily.”

Based on home sales, construction starts and mortgage
delinquencies, the housing market is “halfway back to normal,”
said Jed Kolko, chief economist of Trulia Inc., a San Francisco-based real estate website operator.

Houston, Chicago

“It’s likely that it will be another three years or so --
maybe the end of 2015 or the start of 2016 -- before we see that
market nationally back to normal,” Kolko said in a Dec. 26
interview on Bloomberg Television. “Some local markets, like
Houston and the San Francisco Bay area, are actually close to
where the normal areas are. Whereas others, like Chicago and
Atlanta, are a long, long way from normal.”

Home prices rose 4.3 percent in October from a year
earlier, the biggest year-over-year price gain since May 2010,
according to the S&P/Case-Shiller index of 20 cities. The gauge
is up almost 9 percent since hitting a 10-year low in March. It
fell as much as 35 percent from a July 2006 peak.

Competition among buyers seeking to take advantage of low
prices and record-low interest rates propelled the price gains,
Kolko said. The rate for a 30-year fixed loan tumbled to an all-time low of 3.31 percent in November, according to Freddie Mac.
The number of homes listed for sale that month fell to the
fewest since December 2001, data from the National Association
of Realtors show.

Underwater Homeowners

“Price increases will spur more new construction, which
will add to inventory,” Kolko said in an e-mail. “And price
increases will lift some underwater borrowers back above water,
encouraging some of them to sell,” he said, referring to
homeowners who owe more than their property is worth.

More homeowners who awaited higher prices are preparing to
list their houses this year by painting, laying carpets and
sprucing up kitchens and bathrooms, said Alan Smith, a broker
with Re/Max Professionals in Littleton, Colorado.

“There’s a lot of updating going on so they’re ready to go
to market,” Smith said in a telephone interview from his office
in the Denver area, where prices climbed 6.9 percent in the 12
months through October. “A lot of folks’ homes are tired and
they haven’t had the money or the time to update them.”

The estimated 11 million underwater homeowners have created
a “paradox of negative equity,” according to Sam Khater,
senior economist for CoreLogic Inc., an Irvine, California-based
real estate data service. Because they can’t sell without taking
a loss, these homeowners have helped drive up prices by limiting
inventory listed for sale, he said.

Distressed Sales

Distressed home deals already account for a smaller share
of transactions. In November, 22 percent of resales were
foreclosures or short sales, when the lender agrees to sell for
a loss. That was down from 29 percent a year earlier, according
to the Realtors group.

The decrease is helping to boost home-price indexes and
creating a false sense of a healthier market, said Michael
Feder, CEO of Radar Logic Inc., a New York-based property price
research company.

“We are not in a real housing recovery yet,” he said in
an e-mail. “Current signs of improvement could evaporate
quickly.”

Blackstone Buying

Distressed-home inventory has been drying up as investors
purchase foreclosed properties and other low-cost homes.
Blackstone Group LP, the world’s largest private-equity firm,
has been buying as much as $100 million of homes a week to
manage as rentals or sell when prices rise.

“We think there’s a lot more home price appreciation to
go,” Blackstone President Tony James said at a Dec. 5
conference in New York sponsored by Goldman Sachs Group Inc.

Homes that were seriously delinquent, in the foreclosure
process and not yet listed for sale, known as the shadow
inventory, shrank 12 percent in the 12 months through October to
2.3 million units, CoreLogic reported Jan. 2.

“Given the long foreclosure timelines in many states, the
current shadow inventory stock represents little immediate
threat to a significant swing in housing market supply,” Mark
Fleming, CoreLogic’s chief economist, said in a statement.
“Investor demand will help to absorb the already foreclosed and
REO properties in the shadow inventory in 2013.”

Buyer Traffic

Builders such as New Home’s Webb are seeing a lot of
interest from prospective buyers. More than 6,500 people visited
Lambert Ranch’s model homes on opening weekend in May, and high
traffic continues from homeseekers with resources to buy, Webb
said.

Shoppers will soon have more options. In Orange County,
California, where New Home Co. is based, two dozen subdivisions
are opening this year, the most since 2006, Webb said.

Webb, a homebuilder for 25 years, co-founded the New Home
Co. in 2009 after his previous company, John Laing Homes, went
through bankruptcy liquidation. Just three years earlier, as the
housing prices were about to crash, John Laing was sold for
$1.05 billion to Emaar Properties PJSC, a Dubai-based developer.

“We’re not looking for some crazy boom,” Webb said.
“We’d just like to see consistent sales and modest price
appreciation.”